Abstract
The Selected Issues paper analyzes how fast Ireland will grow in the future. The approach of this paper is to consider the catch-up in labor utilization productivity and use independent demographic projections and other considerations to make reasonable assumptions about labor productivity and utilization growth in the future. It uses a simple growth-accounting framework, and discusses the trends in labor utilization and productivity per hour in the past. The paper also describes the spectacular boom of the Irish housing market and its key drivers from an international perspective.
IV. The role of Social Partnership Agreements in Ireland: Contributing to the boom and facilitating adjustment to sustainable growth1
A. Introduction
1. The social partnership agreements negotiated by the representatives of labor, employers and government since 1987 have often been cited as central to Ireland’s economic success. Although views differ about the precise impact of these agreements, there does appear to be a rather broad consensus that they have contributed importantly to the economic revival that began in the late 1980s. The partnership process was born under conditions of economic crisis that helped coalesce a common view of the macroeconomic conditions required for recovery and instill the willingness in social partners to cooperate to achieve them. The agreements, although principally focused on governing wage growth, have been credited with: generating public support for the policies to foster Ireland’s integration within Europe; enhancing Ireland’s international competitiveness by moderating wage growth and delivering an era of labor peace; and focusing policy on improving the supply side of the Irish economy. The agreements, however, are not without their critics who have argued that they do not allow for sufficient wage flexibility, may not have delivered the wage restraint that they have been credited with, are becoming too broad and include too many partners, and place inappropriate constraints on public policy.
2. Understanding the contribution of the social partnership agreements to Ireland’s remarkable economic performance over the last decade and a half will be essential to assessing how they may help with the challenges ahead. In particular, the economic circumstances in Ireland are now much different than in 1987 and the greatest challenge faced by the country will be managing the transition to a lower, more sustainable rate of economic expansion. With a view to stimulating the debate on how social partnership can contribute to this transition, this note outlines the broad nature of the social partnership agreements, their perceived contributions to the Irish miracle, the challenges that the partnership process faces and some suggestions on the directions in which it might be useful to consider modifying the process going forward.
B. Social Partnership Agreements
3. The social partnership agreements were born at a time of economic crisis that helped to both galvanize a common view of the major sources of Ireland’s malaise and build the will to cooperate to remedy them. Centrally negotiated wage agreements had first been tried in Ireland in the 1970s in response to the stagflation generated by the oil price shocks. However, they were abandoned in 1981 until their revival as part of the first social partnership agreement in 1987. At that time, Ireland faced a severe economic crisis. Growth was nonexistent and unemployment was 17 percent. The fiscal deficit was 8 percent of GDP and the public debt was well over 100 percent of GDP. In response to the deteriorating fiscal situation, tax rates had been soaring thereby reducing real incomes and encouraging net emigration that was draining away Ireland’s best and brightest. Ireland was caught in a self-reinforcing downward spiral. Within this context, the social partners were able to agree on a common analysis of Ireland’s fundamental macroeconomic problems (A Strategy for Recovery (1986)). This common analysis led to agreement on the appropriate redress and the negotiation of the first social partnership agreement.
4. Initially the agreements focused primarily on the broad macroeconomic environment and income distribution. In the initial agreement (Programme for National Recovery), a moderate pay increase was combined with a commitment to cut fiscal expenditures and reduce labor income taxes to further increase take-home pay. This was viewed as a means to restore growth and allow for improvement in public finances, the key to stabilizing the macroeconomic environment. The next two agreements, the Programme for Economic and Social Partnership and the Programme for Competitiveness and Work were similarly focused. They combined moderate wage increases with tax reductions that had become feasible with the growing improvement in the fiscal accounts owing to the restoration of growth and prudent management of fiscal expenditures.
5. As the broad macroeconomic environment stabilized and economic recovery got underway, the focus on supply-side and equity issues increased. In 1997, the government invited a much wider range of partners than previously to participate in the formulation of Partnership 2000. Not only were volunteer organizations invited to participate, but partners’ profiles also became more decentralized with representation from the sectoral, community and enterprise levels. See Box 1 for an account of the evolution of the main elements of social partnership agreements.
C. The Contribution of Social Partnership Agreements
6. The social partners’ common analysis of Ireland’s economic ills in 1986-87 allowed for a policy environment focused on restoring sound macroeconomic fundamentals. This common view, shared by social partners and all political parties, is argued to have been instrumental in allowing government policy to shift away from a short-term perspective toward a longer-term strategic focus (Honohan (1999)). In particular, the consensus enabled the government to implement policies to improve public finance as the agreements outlined objectives for the evolution of government debt as a share of GNP. Further, the process sharpened the recognition that Ireland would become increasingly dependant on its integration within the wider European economy, thus building consensus for the macro policies necessary to facilitate that integration. Increasing stability in public finance and macroeconomic performance provided support for Ireland’s participation in ERM, setting up a virtuous circle facilitating EMU membership and speeding European integration and the arrival of the associated benefits.
The Social Partnership Agreements
Social partnership agreements In Ireland have covered three broad areas: macroeconomic environment; income distribution; and supply-side issues. The first agreement, negotiated between representatives for labor, employers and government, covered a three-year period,1988-90. Since then, a new agreement has been negotiated every three years. The key aspects of each of the agreements are listed below.
Programme for National Recovery (PNR) 1988-1990:
Basic annual pay increases: 3 percent on the first £120 of weekly pay; 2 percent on any amount above that; and minimum £4 per week increase for the low paid.
The final pay agreements were to be negotiated at the local level with the expectation that only in exceptional circumstances would the basic increases not be awarded.
A one hour reduction in the working week to be negotiated locally.
Commitment by the government to income tax and other tax reforms that would further increase take-home pay and significant cost cutting measure to reduce the budget deficit.
Programme for Economic and Social Progress (PESP) 1991-1993:
Basic pay increases: 4 percent in the first year; 3 percent in the second year; 3¾ percent in the final year; and minimum per-week increase for the low paid.
An additional 3 percent local-bargaining component was introduced. It was understood that in negotiations for the additional 3 percent, the implications for competitiveness would be taken into account and there would be allowances for flexibility and change.
Commitments for job creation in specific sectors and the Minister for Labor committed to undertake specific measures to enhance worker protection, employment equality and holidays.
Programme for Competitiveness and Work (PCW) 1994 - 1996:
Basic pay increases for the private sector: 2 percent in the first year; 2½ percent in second year; 2½ percent in the first six months of the third year; and 1 percent in the final six months of the third year.
Basic pay increases in the public sector: a pause for five months; 2 percent in each of the next two years; 1 percent in the next four months, 1½ percent for the next three months; and 1 percent in the last six months.
Because the public sector had not received the 3 percent local-bargaining component during the term of the PESP, this agreement allowed for those increases to be paid provided allowances were made for flexibility and change and offsetting improvements in quality were achieved.
Partnership 2000, 1997 -1999:
Basic pay increases: 2½ percent increase for the first year; 2¼ percent for the second year; 1½ percent for the next 9 months; 1 percent in the last 6 months; and minimum pounds-per-week increases for the low paid.
Local-level negotiations after the first 18 months to augment agreed pay increases by no more than a further 2 percent.
A reduction in personal income taxes estimated to increase the level of take home pay by 5 percent.
In addition to pay increases, the agreement covered a range of issues in the following areas: greater social inclusion and equality; promoting enterprise and jobs; modernizing the public sector; and partnership and monitoring.
The number of social partners invited to participate in the agreement increased with the inclusion of volunteer groups and the extension of partnership to sectoral, community and enterprise levels.
Programme for Prosperity and Fairness (PPF) 2000-2002:
Basic pay increases: 5½ percent in both the first and second years; 4 percent in the last 9 months; and minimum pounds-per-week increases for the low paid.
The public sector pay increases were identical with the exception that the final 4 percent increase was to be contingent upon achieving specific performance indicators.
There was agreement to undertake an exercise to benchmark public sector wages to those in comparable professions in the private sector. This was meant to put a stop to the ever accelerating wage demands resulting from attempt by various public sector unions to restore or maintain historical wage relativities. The recommendations of the benchmarking body were not to be implemented until the next agreement.
The minimum wage was increased to £4.70 from July 2001 and to £5.00 from October 2002.
A commitment, through lower labor income taxes, to ensure that net take-home pay including pay increases would increase by at least 25 percent over the period of the agreement.
In addition to pay increases the agreement covered a range of issues in the following areas: living standards and workplace environment; prosperity and economic inclusion; social inclusion and equality; successful adaptation to continuing change; and renewing partnership.
Sustaining Progress (SP) 2003 -2005:
Basic pay increases for first 18 months: 3 percent in the first 9 months; 2 percent in the next six months; and 2 percent in the final 3 months (first time wage negotiation was split into 2 sub periods).
Basic pay increases for second 18 months (agreement reached in July 2004): 1.5 percent for last six months of 2004 (2 percent for those with hourly wage of €9.00 or less); 1.5 percent for first six months of 2005; and 2.5 percent for final six months.
Increase in minimum wage to €7.00.
The opt-out provisions for firms unable to pay the agreed increases due to commercial or external competitiveness reasons was strengthened.
Public sector basic pay increases for first 18 months: pause of six months; 3 percent from January 2004; 2 percent from July 2004; and 2 percent from December 2004.
Public sector basic pay increases for second 18 months (agreement reached in July 2004): 1.5 percent from June 1 2005; 1.5 percent from December 1, 2005; and 2.5 percent form June 1, 2006.
It was agreed that 25 percent of the recommendation of the public sector benchmarking body would be effective from January 1, 2001 and would be paid upon ratification of SP. A further 50 percent of the increase would be paid on January 1, 2004 with the final 25 percent paid on June 1, 2005.
There was agreement that benchmarking would become a regular feature of pay determination in the public sector and the next benchmarking exercise would commence in late 2005 with the report coming in late 2007 (agreed in July 2004).
In addition to pay increases the agreement covered a range of initiatives in the following areas: special initiatives; building, maintaining and sharing economic development and prosperity; delivering a fair and inclusive society; workplace relations and environment; and delivering quality public services.
7. The agreements are widely credited with enhancing competitiveness by moderating wage demands, and delivering an era of relatively peaceful labor relations. Although favorable development in the external environment certainly played an important role in increasing demand for labor in Ireland in the 1990s, the wage moderation contained in the social partnership agreements is argued to have helped maximize the benefits from those developments. It is worth noting that although the agreements only apply explicitly to the unionized sector of the economy (dominated by public sector unions), the agreed wage increases play a critical role in the formulation of wage expectations and thereby provide a benchmark for general wage setting across the whole Irish economy. Lane (1998) illustrates that over the 1987 to 1996 period, the profit share of output, the return on investment and the markup over unit labor costs all increased substantially with a corresponding decline in labor’s share of output even in the face of a significant increase in employment. All these point to moderation in wage demands. Figure 1, which presents the labor and capital shares of GNP in the business sector over the 1980 to 2003 period, suggests that the trends identified by Lane continued until the end of the 1990s, after which time shares appear to have stabilized. Additional evidence, presented in Honohan and Walsh (2002), suggests that Irish competitiveness in industry increased steadily over the 1990s, improving by roughly 15 percent relative to its major trading partners by the end of the decade.2 In terms of labor peace, the evidence suggests that the agreements have had a positive impact. The incidence of strikes and the resulting lost working days presented in Taylor (1996) and extended below in Table 1 suggest that there has been a significant improvement. Relative to the sixteen-year period prior to 1988, the last sixteen-year period has witnessed roughly a fivefold reduction in the average number of days lost per year and a fourfold reduction in the number of disputes. Considering that with employment growth there has been a substantial increase in the potential number of work days since 1987, the improvement is even more significant than the numbers themselves suggest.
Wage and Capital Shares in Business Sector Output
Citation: IMF Staff Country Reports 2004, 349; 10.5089/9781451818802.002.A004
Source: OECD.Number of Disputes and Work Days Lost
Number of Disputes and Work Days Lost
| During the Sixteen Year Period of 1972-87. | During the Sixteen Year Period of 1988-2003. | ||||
|---|---|---|---|---|---|
| Disputes | Days Lost | Disputes | Days Lost | ||
| 1972 | 131 | 206,955 | 1988 | 65 | 143,393 |
| 1973 | 182 | 206,725 | 1989 | 38 | 50,358 |
| 1974 | 219 | 551,833 | 1990 | 49 | 222,916 |
| 1975 | 151 | 295,716 | 1991 | 54 | 85,513 |
| 1976 | 134 | 776,949 | 1992 | 38 | 190,609 |
| 1977 | 175 | 442,145 | 1993 | 47 | 61,312 |
| 1978 | 152 | 613,016 | 1994 | 28 | 25,550 |
| 1979 | 140 | 1,464,952 | 1995 | 34 | 130,300 |
| 1980 | 130 | 412,118 | 1996 | 30 | 114,585 |
| 1981 | 117 | 433,979 | 1997 | 28 | 74,508 |
| 1982 | 131 | 434,253 | 1998 | 33 | 37,374 |
| 1983 | 154 | 319,015 | 1999 | 32 | 215,587 |
| 1984 | 192 | 386,421 | 2000 | 39 | 97,046 |
| 1985 | 116 | 417,726 | 2001 | 24 | 114,613 |
| 1986 | 102 | 309,178 | 2002 | 27 | 21,257 |
| 1987 | 80 | 264,339 | 2003 | 23 | 37,482 |
| Total | 2306 | 7,535,320 | Total | 589 | 1,622,403 |
| Average number of days lost per annum - 470,958 | Average number of days lost per annum - 101,400 | ||||
Number of Disputes and Work Days Lost
| During the Sixteen Year Period of 1972-87. | During the Sixteen Year Period of 1988-2003. | ||||
|---|---|---|---|---|---|
| Disputes | Days Lost | Disputes | Days Lost | ||
| 1972 | 131 | 206,955 | 1988 | 65 | 143,393 |
| 1973 | 182 | 206,725 | 1989 | 38 | 50,358 |
| 1974 | 219 | 551,833 | 1990 | 49 | 222,916 |
| 1975 | 151 | 295,716 | 1991 | 54 | 85,513 |
| 1976 | 134 | 776,949 | 1992 | 38 | 190,609 |
| 1977 | 175 | 442,145 | 1993 | 47 | 61,312 |
| 1978 | 152 | 613,016 | 1994 | 28 | 25,550 |
| 1979 | 140 | 1,464,952 | 1995 | 34 | 130,300 |
| 1980 | 130 | 412,118 | 1996 | 30 | 114,585 |
| 1981 | 117 | 433,979 | 1997 | 28 | 74,508 |
| 1982 | 131 | 434,253 | 1998 | 33 | 37,374 |
| 1983 | 154 | 319,015 | 1999 | 32 | 215,587 |
| 1984 | 192 | 386,421 | 2000 | 39 | 97,046 |
| 1985 | 116 | 417,726 | 2001 | 24 | 114,613 |
| 1986 | 102 | 309,178 | 2002 | 27 | 21,257 |
| 1987 | 80 | 264,339 | 2003 | 23 | 37,482 |
| Total | 2306 | 7,535,320 | Total | 589 | 1,622,403 |
| Average number of days lost per annum - 470,958 | Average number of days lost per annum - 101,400 | ||||
8. The agreements have also been credited with improving the supply-side of the economy by facilitating structural change to improve competitiveness. An important element of the wage negotiation process was the government’s commitment to reductions in labor income taxes. In addition to their cited benefit of helping to moderate wage demands, these tax reductions provided a much needed increase in the incentives to work, boosting labor supply. The evidence presented in Taylor (1996) suggests that the local-level component, which was in addition to basic pay increases, successfully increased awareness of the need for flexibility and change and provided the incentives to achieve them, further enhancing productivity and competitiveness.
D. The Challenges To Come
Wage flexibility
9. Greater nominal wage flexibility will be required in the future because currency union implies a more rigid monetary policy regime than ERM participation. This argument, as outlined in Calmfors (2003), assumes that under common monetary policy asymmetric shocks or different national responses to common monetary policy will require alternative adjustment mechanisms, the most important of which is nominal wage flexibility. Until the most recent agreement (Sustaining Progress), the social partners negotiated wage increases to cover three-year periods, which helps to reduce bargaining costs and increases certainty about labor costs for firms. However, nominal wage growth set for three-year intervals may not allow for sufficient flexibility in the face of increased variability in demand and, consequently, employment and output could become more variable.
10. The success of partnership agreements in improving economic growth in Ireland and bringing living standards up to the European average creates pressure for more flexibility in wage setting. Figure 2 illustrates that the significant decline in labor’s share of output in the business sector in Ireland, which has occurred since the mid 1980s, now brings this ratio close to that in the other major European economies, particularly once payroll taxes, which are not included in the figure, are accounted for. At the same time, Figure 2 illustrates that the decline in labor’s share in Ireland did not simply reflect an increase in the capital-to-labor ratio, suggesting that wage moderation via social partnership successfully reduced the relative price of labor. Not surprisingly given Ireland’s economic success, the shared sense of crisis and the need for wage moderation no longer appear to have the same prominence in the bargaining process that now appears to be more focused on ensuring real wage gains reflect productivity growth. Accurately forecasting productivity growth over a three-year horizon is difficult and, with the catch-up process largely complete, the tendency to use the past as guide to forecast the future could result in over estimating productivity growth rather than under estimating it as occurred in the past. Wage increases based on a three-year over estimation of productivity growth could seriously erode competitiveness.
Cross Country Comparison
Citation: IMF Staff Country Reports 2004, 349; 10.5089/9781451818802.002.A004
Source OECD11. Given that dispersion in productivity growth across sectors is likely to continue to be a feature of the Irish economy, avoiding significant price inflation in low productivity sectors will require increased sectoral wage flexibility. Ireland’s openness and favorable business environment have led to a significant inflow of FDI and a boom in the high technology sector that has become an increasingly important determinant of aggregate productivity growth. Centralized wage increases that are based on aggregate productivity growth with only limited scope for local-level bargaining could lead to wage increases in low productivity sectors that result in significant inflation pressures. If this leads to Irish inflation persistently above that of its major trading partners, competitiveness will be eroded. Partnership faces the daunting challenge of ensuring an equitable sharing of the benefits of real economic growth while at the same time preventing price inflation from eroding competitiveness and undermining future growth prospects.
Controlling wage growth
12. Comparing actual wage growth in Ireland with the increases negotiated through social partnership leads to questions about how tightly the agreements govern wage growth. Over the period covered by the social partnership agreements, actual wage growth has consistently and significantly outstripped the increases set out in the agreements as the figure illustrates. As noted in MacCoille and McCoy (2001) this has not been due to inflation surprises leading to increases in nominal wages above those negotiated, as real wage increases have also consistently outpaced those envisioned by the agreements. In addition to this casual empiricism, Fitz Gerald (1999), looking for evidence of a structural break in the wage determination process after 1987, finds little empirical support for the theory that social partnership agreements altered the wage determination process in Ireland. It is argued in Boyle, McElligott and O’Leary (2004) that the labor income tax reductions negotiated as part of social partnership may have allowed the public sector wage premium to be maintained when tightness in the labor market, particularly in the late 1990s, might have otherwise eroded it. With private sector disposable incomes benefiting from tax reductions, there may have been less resistance than otherwise to the public sector wage settlements, which, ex post, were also exceeded. In addition, the public sector benchmarking exercise completed in 2003 recommended additional average wage increases of 9 percent above partnership agreed increases that will be completely phased in by mid-2005. In practice it appears that the central wage agreements have set a floor or starting point for local wage determination, even in the public sector. When Ireland was enjoying economic growth that was much faster than anticipated, this did not present a problem. However, it may have ingrained expectations of the wage setting process that will become increasingly impossible to realize as growth moderates to long-term sustainable rates and partnership negotiated basic pay increases are in line with realized inflation and productivity outcomes.
Average of Annual Wage Growth: SPA and Actual
Citation: IMF Staff Country Reports 2004, 349; 10.5089/9781451818802.002.A004
1/ SPA including local-bargaining component.2/ 2003 data through September.Source: SPA, MacCoille and McCoy (2001), and Casey (2004).Broadening social partnership
13. The growth in both the number of partners and the areas that the agreements cover increases the potential for conflict that could slow and possibly undermine agreement. Box 2 contains a list of the participants in the most recent agreement, Sustaining Progress, and an outline of the areas that the agreement covers. It is argued that broadening the participation and scope of social partnership increases the general ownership of partnership initiatives, increases the commitment to achieve those initiatives and overall contributes positively to formulating the public policy agenda. As noted in O’Donnell (2001), however, this growth also presents a number of challenges. First, for many of the non-pay areas covered in agreements, partners are not bound to take specific actions to ensure their achievement. Consequently, progress has been perceived as slow and each subsequent agreement attempts to strengthen commitments to non-pay initiatives with little evidence of success.3 Second, as the coverage of issues broadens it includes many more areas that high-level strategies cannot address. As a result, the number of working groups and task forces has areas covered in agreements, partners are not bound to take specific actions to ensure their achievement. Consequently, progress has been perceived as slow and each subsequent agreement attempts to strengthen commitments to non-pay initiatives with little evidence of address. As a result, the number of working groups and task forces has exploded, increasing the bureaucracy surrounding the process. Third, measuring the effectiveness of initiatives in many areas has been difficult and attempts to improve measurement and monitoring of progress are further adding to the bureaucracy. Taken together, these factors suggest that the broadening of the social partnership process, although not without some positive aspects, may slow the process and increase the potential for dissatisfaction and disagreement. This in turn could lead to difficulties in reaching agreement on the central issue of wages. Or, even less desirably, failure to make progress on these only tangentially related issues could lead to pressures and possibly concession on wages that undermine competitiveness.
The Partners Participating and the Coverage of Sustaining Progress 2003–05
Partners: Irish Business and Employers Confederation (IBEC); Irish Congress of Trade Unions (ICTU); Construction Industry Federation (CIF); Irish Farmers’ Association (IFA); Irish Creamery Milk Suppliers Association (ICMSA); Irish Co-operative Organization Society Ltd. (ICOS), Marca na Feirme; Irish National Organization of the Unemployed (INOU); Congress Centers for the Unemployed; The Community Platform (consists of 26 organizations); Conference of Religious Ireland (CORI); National Women’s’ Council of Ireland (MWCI); National Youth Council of Ireland (NYCI); Society of Saint Vincent de Paul; Protestant Aid; Small Firms’ Association (SFA); Irish Exporters’ Association (IEA); Irish Tourist Industry Confederation (ITIC); and Camber of Commerce of Ireland (CCI).
Coverage:
Part One: A Policy Framework for Sustaining Progress
Special Initiatives: Housing and Accommodation; Cost and Availability of Insurance; Migration and Interculturalism; Long-term Unemployed and Vulnerable Workers and Those Made Redundant; Educational Disadvantage; Waste Management; Care - Children, Disabled and the Elderly; Alcohol and Drug Abuse; Including Everyone in the Information Society; and Ending Child Poverty.
Macroeconomic Policy: Overall Objectives; Public Expenditure; Taxation; and Competitiveness and Inflation.
Building Maintaining and Sharing Economic Development and Prosperity: Overall Objective; Infrastructure and the Environment; and Adaptation to Continuing Change.
Delivering a Fair and Inclusive Society: Poverty and Social Inclusion; Health and Addressing Health Inequalities; Equality; Access to Quality Public Services; and Challenge of Delivering a Fair and Inclusive Society.
Part Two: Pay and the Workplace
Private Sector Pay and Related Issues: Private Sector Pay; Statutory Minimum Pay; Redundancy Payments; Pension and Sick Pay Schemes; Partnership at the Workplace; Affordable Housing Initiative; Anti-Inflation Initiative; and Information, Consultation, Employee Representation and Employer/Employee Dialogue.
Workplace Relations and Environment: Workplace Legislation and Codes; Gender Pay Gap; Work/Life Balance Programmes (Maternity Leave, Adoption Leave, Parental Leave, National framework for Work/Life Balance Polices, Workplace Childcare, Fully Inclusive Social Insurance Model); Equal Opportunities; Workplace Learning; Health and Safety at Work; Hidden Economy Monitoring Group; Pensions; and Migrant Workers.
Public Sector Pay and Related Issues: Public Service Pay; Commitment to Modernization; Modernization and Flexibility; Civil Service; Health Service; Education Sector; Local Government Sector; and Performance Verification.
Constraints on public policy
14. Although linking tax cuts with wage moderation may have been successful in the past, allowing the social partnership process to dictate and potentially constrain public policy may become problematic going forward. The reductions in labor income taxes that have been implemented since the beginning of the partnership process were both necessary from a labor supply perspective and warranted because prudent fiscal management during a period of healthy growth dramatically improved public finances setting up a positive self-reinforcing dynamic. Now that the catch-up process in Ireland has moved a long way towards completion, the self-reinforcing dynamic is close to being played out and the scope for further labor income tax cuts is becoming more limited, as are the potential benefits given tax reductions to date and improvements in participation rates. As economic growth in Ireland converges to lower, more sustainable rates, there will be less fiscal room for tax cuts. Further, there will be significant pressure for available resources to be directed toward the improvements in public infrastructure that are required to ensure the sustainability of the current level of economic activity and allow for continued healthy growth. At this point in Ireland’s development, public infrastructure investment will likely yield the most substantive gains because the impact of tax cuts on participations rates can be expected (as suggested in Callan and others (2003)) to yield diminishing marginal returns. The absence of any explicit fiscal concession in the most recent agreement was a welcome sign and the introduction of the multi-year spending envelopes for public investment will likely help to maintain infrastructure investment. However, there are still risks that scarce fiscal resources will not be directed where the returns will be greatest if fiscal policy continues to be linked to wage negotiations.4 In addition, it can also be argued that public policy should ultimately be determined by the elected legislature not the unelected social partners.
E. The Social Partnership Process Going Forward
15. Shortening the duration of the wage component of the Social Partnership Agreements would enhance aggregate nominal wage flexibility. The level of economic uncertainty prevailing when Sustaining Progress was being negotiated prompted the social partners to agree to set wage growth initially for only 18 months and then to return to the bargaining table just over a year later to set wage growth for the remaining 18-month period. This clearly served to enhance wage flexibility. Agreed wage growth moderated by 1½ percentage points in the second period. The stricter monetary regime implied by the move from ERM to EMU, the rate of economic expansion slowing to a more sustainable rate, and the fact that wage expectations may not have fully adjusted to actual future growth prospects all ague in favor of continuing to set wage growth for periods shorter than three years. Several commentators have recognized the need for greater flexibility going forward and proposals - such as those in Hardiman (2000), de Buitleir and Thornhill (2001), Macoille and McCoy (2001), and McHale (2001) - have been advanced to increase aggregate flexibility. Essentially the flexibility in these proposal arises from basing part of labor’s compensation on ex post outcomes, thereby increasing the responsiveness of wages to realized growth and limiting the potential for forecast errors to erode competitiveness.5 However, these proposals would be quite difficult to implement in practice and shortening the duration of the wage agreements enhances flexibility while being very straightforward to implement. To reduce, or possibly more than offset, the increased bargaining costs that would arise from more frequent negotiations, social partners could agree on the set of macroeconomic data that would be used regularly to determine the range within which wage settlements should lie prior to the start of negotiations. Although setting wages for shorter intervals would reduce labor cost certainty for firms, this would be offsets by the benefits that would arise from wages being more responsive to unexpected macroeconomic or sector specific developments.
16. The ability for firms to deviate from agreed wage increases should continue to be strengthened. Over much of the period covered by social partnership agreements, growth has exceeded expectations and, consequently, partnership agreed wage increases have been affordable to firms. In part this has been at the expense of rapid price inflation in the lower productivity service sector. With Ireland’s price level now equal to or above those in its major trading partners, there is no longer any scope for low productivity sectors to accommodate excessive wage increases by raising prices faster than ECB’s target rate for inflation. Going forward, a larger number of firms, particularly those in low productivity sectors, may find it difficult to afford partnership agreed wage increase that are based on aggregate inflation and productivity growth. To avoid raising prices, these firms will need to offer wage increases notably below those centrally agreed. It will be important that the mechanism in place to allow firms to do this is not too onerous for firms to resort to and does not lead to labor unrest. Partnership agreements could more explicitly detail exactly what financial or competitive circumstances would allow firms to pay lower than centrally agreed increases. Further, social partners should regularly communicate that it will become increasingly likely that more firms may need to pay less than the centrally agreed increases because the convergence process in Ireland is largely complete.
17. Fiscal policy concessions should no longer be used to moderate wage demands within the social partnership process. Although there may have been merit in the past to encouraging wage moderation by having the government commit to labor income tax reductions, circumstances and priorities in Ireland have shifted since the initial days of social partnership. Labor force participation rates suggest that the incentives to work in Ireland are strong, but years of under funding in public infrastructure given the rate of economic expansion has left a public capital stock gap that needs to be filled. If the labor-income-tax option is available, the government could easily be tempted to use it to achieve short-term labor peace if social partnership negotiations are not going well. However, doing so could have very significant medium-term costs if public investment is foregone as a result. This argues for a transparent and binding medium-term fiscal framework that clearly separates fiscal policy from the social partnership wage negotiation process. Government could (and should) continue with its central role in the partnership process both in terms of leadership and as an employer; however, the option for trading wage moderation for tax reductions would be ultimately constrained by the medium-term fiscal framework. Placing constraints on the government’s negotiating options in this way would move toward the ideal of having public policy determined by the elected legislature and not the unelected social partners. Further, removing fiscal concessions from the bargaining table could also help speed the negotiation process and offset the increase in costs of holding wage negotiations more frequently than every three years.
18. Steps should be taken to put more distance between the wage negotiations process and the far reaching social objective that have become an increasingly important part of social partnership agreements. Broadening the participation in the partnership process has undoubtedly increased the general ownership of partnership initiatives and contributed positively to the formulation of the policy agenda. However, the large number of participants and issues adds considerably to the time and costs of negotiating each agreement and many of the issues are largely unrelated to the central issue of wages. Having this broader group participate at the time of every other wage negotiation for example would considerably reduce the cost of holding wage negotiations more frequently. This would retain many of the benefits of the current process without a significant loss in its effectiveness as these broader social issues evolve more slowly as policy initiatives require time to have an impact.
F. Conclusions
19. The social partnership process has made an important contribution to Ireland’s exceptional economic revival. However, with circumstances and priorities now much different, changes to the process should be considered. Strong arguments can be made that the current wage determination process does not provide the nominal wage flexibility that Ireland will need going forward. To increase nominal wage flexibility, shortening the duration of the central wage agreement, as was done for Sustaining Progress, should become a permanent feature. Although more frequent wage negotiations could potentially entail increased negotiations costs, steps can be taken on several fronts to minimize these costs. Continuing to strengthening the mechanism for firms to deviate from the centrally agreed increases would also enhance flexibility. In addition, cogent arguments can be made that fiscal policy should be more distant from the wage negotiation process. Developing a medium-term fiscal framework that clearly constrains the government’s ability to make fiscal concessions to facilitate agreement would help ensure that scarce public resources are directed where returns will be greatest. The volunteer and community sectors should continue to play an important and helpful role in the partnership process but the cost of this participation should be reduced by having the most inclusive range of partners participate less frequently.
References
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Callan. T., A Van Soest and J. Walsh, 2003, “Taxes, Benefits and Labor Market Responses: New Evidence for Ireland,” The Economic and Social Research Institute Policy Research Paper No. 48.
Calmfors, L., 2003, “Wages and Wage Bargaining Institutions in the EMU–A Survey of the Issues,” in R. Franzese, P Mooslechner and M. Schurz (eds.), Institutional Conflicts and Complementarities: Monetary Policy and wage Bargaining Institutions in EMU: Kluwer Academic Publishers, Netherlands.
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Prepared by Ben Hunt.
In commenting, Barry Bosworth, however, argues that a large part of the increase in Honohan’s and Walsh’s measure of competitiveness arises from the de-trending technique employed.
This process is succinctly summarized on page 19 in O’Donnell (2001) “Having got them in, they worked to turn platitudes into agreement. Confronting the limits of that they pressed to turn agreements into commitments. Limited progress suggested it was necessary to turn commitments into targets. Now that the dictionary is used up, the question is how can these targets be met?”.
McHale (2001) notes that in December 2000, key union leaders waited until they saw the contents of the 2001 Budget before giving their final assent to a renegotiation of initial wage increases that had been set out in the PPF.
Part of the drawback of the offered proposals is their complexity, the further entwining of fiscal policy and wage determination (McHale (2001)), and the fact that they do not allow for more sectoral flexibility.
